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KAREN BERNICK | Dec 01, 2009

In the past four years, Mark Haines and his wife Trisha have kept a fast pace to grow their Sigourney, IA, farming operation from 1,500 acres to their current 4,200 acres. Their cropping enterprise is split almost evenly between corn and soybeans, with a few hundred acres of hay grown for their 150-head beef herd. They also raise hogs.

In 2008, the Haineses built a new grain bin to increase their on-farm storage capacity from 85,000 to 135,000 bu. To do that, they tapped into Cargill's Working Bushels On-Farm Storage (OFS) program, which earns growers a new GSI grain bin at a significantly reduced price in exchange for a three-year grain marketing commitment on a like number of bushels.

“I purchased a 50,000-bu. bin and they paid for half of it,” says Haines of his deal with Cargill. Cargill covered the cost of the bin shell, inside and outside ladders, a safety cage platform, flooring and flooring supports. Vents, sweeps, load-out, electrical, concrete, installation and all upgrades (Haines added a floor aeration fan) are paid for by the grower. Haines used a low-interest Farm Service Agency loan to help finance his portion of the project.

“On average, the savings range from 35% to 60% of the total cost associated with building on-farm storage,” says Kurtis Klecker, a contract specialist in Cargill's risk management business unit. Established in 2003, the Cargill OFS program has helped over 1,000 growers across the Midwest purchase new grain storage systems, says Klecker.

“The arrangement we have is exclusive with GSI,” he says. Growers work with their local GSI dealer to select a bin model, desired features and determine the proper dimensions and then submit an application to their local Cargill representative.

“The application process is pretty straightforward and a necessary step to profile the producer's needs and ensure that it's a good fit for their business,” Klecker says. Cargill allows growers to commit up to 25% of their crop.

THE PRODUCER MUST agree to sell Cargill the bin's capacity equivalent in bushels for three crop years. The grain — corn, soybeans or wheat qualify — is priced based on a target futures price corresponding to the futures prices listed at the Chicago Board of Trade, with a specific pricing date for each year of the contract. Cargill offers a variety of pricing offers to establish the target futures price.

If the target futures price is met on the pricing date, the grower is obligated to deliver those bushels to Cargill at the established price, adjusted for local basis. If the futures price falls short of the target, the grower is still obligated to deliver the grain to Cargill but is free to price the grain using whatever Cargill pricing mechanism they desire, in accordance with local delivery policies.

The Haineses' 50,000-bu. contract stipulates a $4.10/bu. target futures price with a pricing date of Sept. 15. “If the December futures price is $4.10 or above on Sept. 15, the corn is sold,” explains Haines. “If the price is lower than $4.10, then the corn is mine to sell. It has to go to Cargill, but I set the price.”

“We work with each individual producer, one-on-one, to assess their needs, their market bias and the target futures price that is most appealing to them,” says Klecker.

Haines says he was aware of the risk if grain prices went up after he set his target price. “There were guys who did $2.50 contracts and then corn prices shot way up. Once you get locked in, you can't get out of it for three years,” he says.

Haines says his timing worked out well. His target price was 3¢ over the futures price on his 2008 pricing date, so it didn't “hit” and he was free to market the grain when he wanted to at the Eddyville, IA, Cargill location where he delivers 90% of his grain.

“We averaged a little bit higher price at $4.25 or so, so it worked out OK,” says Haines. The target price was also not reached this past fall, and Haines is hoping to sell for over $4.25 again.

Steve Staker, who farms with his father Bill and brother Mike near Aledo, IL, built a 32,000-bu. bin using the Cargill program in May 2008, committing roughly 10% of their 2008, 2009 and 2010 crop. Although Staker declines to mention his exact target price, futures prices were lower on the October pricing date in 2008 and 2009. “It was a nice target,” Staker says.

The missed target meant that Staker was also free to choose other pricing options offered by Cargill. “On the 2008 crop, I took out a basis contract and we delivered in a May-June time frame,” says Staker. He exercised another Cargill marketing option for the 2009 crop, which will use an average pricing formula for grain delivered next summer.

Staker says you have to be comfortable with committing the bushels when you take the discount. “Probably one drawback to the program is that it really limits your ability to market those bushels until after the Oct. 15, or whatever the target date is,” he says.

But the deep discount on a new grain bin is a real plus. Staker says the Cargill program allowed his family to make other improvements in their grain-handling system, including installing new air dryers on several older bins. “It freed up some capital so we could make some changes on some other bins that we probably wouldn't have done if we'd have done the GSI bin all by ourselves,” he says.

Haines says that perhaps the biggest benefit to having more bin space is the savings in time and hassles at harvesttime. “You can get into times in the fall when it gets really busy and you can wait a mile and a half in line (at the processor), which means the combine is shut down,” he says.

Staker agrees. “The main reason we put up the bin is that we needed the storage to make things flow right here when we are getting the crop out. We now have a few more options,” he says.

Low-interest Farm Service Agency (FSA) loans are another option for big savings on storage facility construction projects. FSA announced new Farm Storage Facility Loan (FSFL) program guidelines last August, increasing maximum loan amounts from $100,000 to $500,000 and adding 10- and 12-year term options to the seven-year loans included in previous guidelines.

Hay, renewable biomass and even fruits and vegetables now qualify for FSFL loans, in addition to traditional whole grains. Eligible facilities include new conventional bins and cribs designed for whole grain storage; new or remanufactured oxygen-limiting structures for whole grain wet storage; new flat-type storage structures with permanent floors and bulk heads; bunkers with two permanent walls and floors; cold storage for fruits and vegetables; and facilities designed for hay and for renewable biomass. In addition, loans can be used for renovation of existing storage facilities. All facilities must be designed for 15 years of useful life or longer.

Other allowable expenses under the new program include new electrical, safety and quality monitoring equipment integral to the grain facilities; concrete foundations, aprons, pits and pads essential to the storage facilities; and permanently affixed grain handling and drying equipment.

The seven-, 10- and 12-year term options correspond to the amount of the loan, says Jessica Yuska, an FSA program technician in Scott County, IA. Interest rates are locked in during the month the loan is approved.

In October, rates were 3% for seven years, 3.375% for 10 years and 3.75% for 12-year loans. There's no limit to the number of loans that can be obtained.

A 15% down payment is required, and loans must be secured by a promissory note and security agreement, as well as a uniform commercial code (UCC-1) agreement. For loans under $50,000, severance agreements are required from lien holders or landlords on the real estate where the facility will be located. The borrower can increase the down payment from 15% to 20% to avoid obtaining the severance agreement. Loans over $50,000 require a real estate mortgage or an irrevocable letter of credit from another lender.

Dan Schurr, Le Claire, IA, obtained FSFL financing to build a new grain-handling system at his family's operation, Sycamore Creek Farms. Schurr purchased two new grain bins, two legs and installed a high-efficiency grain dryer. He also converted four existing Harvestores into dry corn storage and updated an existing grain bin with new aeration vents.

Schurr says the low-interest FSFL loan significantly reduced the costs associated with the $300,000+ project. “We will probably save 2.5-3% for the 12-year terms,” he says.

The new FSA loan program requires producers to provide financial information and demonstrate a need for storage, says Yuska, who helped Schurr complete the loan application. A $100 fee is charged to process the application. She urges growers to apply for loans well before starting the project.

Editor's note: In addition to the loan, Dan Schurr obtained a $47,000 USDA Rural Development (RD) Energy Efficiency Grant after demonstrating significant energy efficiency improvements with the new grain-drying and handling equipment versus his old system. For more information on RD energy efficiency grants see “Reaping Benefits” in the September issue of CSD.